North Carolina is the only state meeting all of the Pew Charitable Trusts best or good practices in taking care of its “rainy day” reserves.
North Carolina’s reserve requires the state to set aside 15 percent of projected revenue growth to the reserve at the beginning of each fiscal year, and there are clear and objective conditions for withdrawals.
Sen. Brent Jackson, R-Duplin, mentioned the Pew study during a speech Dec. 6 during a luncheon hosted by the N.C. FreeEnterprise Foundation.
The Pew Charitable Trusts is an independent nonprofit focused on providing research and analysis on a slew of public policy subjects. Since 2014, Pew has released several reports on best practices for rainy day funds.
North Carolina became one of six states during this year’s legislative session to reform its rules concerning the reserves. House Bill 7 passed almost unanimously with bipartisan support. Pew gave its support for the bill and emphasized the four areas of H.B. 7 that matched Pew’s best practices:
- Created a savings deposit rule tied to revenue growth
- Defined clear and objective conditions for fund use
- Established an evidence-based fund savings target
- Provided a means to re-evaluate the rules governing the fund.
These practices include defining clear rules for depositing and withdrawing money from the reserves. According to Pew, deposits should be tied to economic growth or revenue. Withdrawals should be reserved for economic or revenue fluctuations.
“Rainy day funds are a really great way to smooth out the volatility of the business cycle,” said Stephen Bailey, an associate manager at Pew Charitable Trusts. “You’re making sure that when another Great Recession happens or a more milder recession, there is enough money in reserve to fund programs that the state cares about the most at all points of the business cycle.”
Pew recommends basing the maximum size of the fund on past revenue fluctuations. The fund should be large enough so that states can withdraw enough to offset a major recession, but not too large that it takes away from programs or could be used for tax cuts.
“[The state] really went from a more ad hoc way of looking at the rainy day fund prior to H.B. 7, but now there is some really good at least structural frameworks in place for how the state is thinking about both how to save and when to withdraw,” Bailey said.
“What the bill did was create four distinct withdrawal conditions for when the funds could be withdrawn. It is tied to when revenue drops below zero, when revenue misses the forecast, to pay for the cost incurred by a court or administrative order, and to provide relief for an emergency.”
If one of those conditions is met, then a simple majority vote from the House and Senate is needed to withdraw from the fund. A two-thirds vote is required if the state wants to withdrawal money exceeding 7.5 percent of the previous year’s General Fund budget.
Bailey said North Carolina is now in a better position to weather a major recession.
“In terms of best practices for deposits, withdrawals, and for setting an optimal savings cap, North Carolina is the only one that matches all those marks right now.”